USA to create 'bad bank' to save financial system from collapse

Barack Obama’s administration set a goal to clear the USA’s financial system of ‘bad assets,’ particularly problematic debts. The illiquid assets are to be transferred onto balance sheets of a new bank. Will the ‘bad’ bank become a time bomb?

Obama’s team considers an opportunity to create a ‘bad bank’ within the scope of anti-crisis measures. The bank can be used to accumulate all ‘infected’ assets from the banks which reduce the capabilities of financial companies to attract funds, USA’s new Treasury chief Timothy Geithner said.

Inga Foksha, an analyst with Investment Company Aton, said that such practice of creating good and bad banks was not new.

“This approach was used in the 1990s during the banking crisis in Switzerland. That is why the Americans have a certain example to follow at this point,” the specialist said in an interview with Bigness.ru news portal.

Obama makes a logic step in this direction, Foksha added, since the banking sphere should be cleared of the so-called toxic assets - it is the very first step which one should make to stabilize the financial system, the specialist added.

“There was a lot of money assigned for the purpose in October. Nevertheless, the plan was not fully executed, and the funds were not spent appropriately. Those amounts were not enough. Even if we double that sum now, it will not be enough to cure the banking sphere, not to mention the fact that it is quite risky to hold auctions and acquire toxic assets from banks. It is difficult to predict how a bank evaluates its assets, how it determines whether they are toxic or not, and how it will handle the funds in case it manages to get rid of those assets and obtain something in return,” the expert continued.

The creation of a ‘bad bank’ in the United States would help filter other ‘bad banks’ which do not let ‘good banks’ develop normally.

“This filtration can distinguish the part of the bank that can be credited. The US financial authorities will filter them and assist them in an absolutely different direction. They will also work separately with those ‘bad banks’ that sank into the mire of their toxic assets,” Inga Foksha said.

Oleg Abelev, the head of the analytical department of Ricom Trust Investment Company, said that one should proceed from the structure of the bank management system.

“To all appearance, it will be a totally government-run bank which they won’t have to nationalize. The bank will have to stay under the control of the state to be able to work with toxic assets. Secondly, it should have a strategy to clear the assets because there is no point to just pile them up,” the expert told Bigness.ru.

“Perhaps it will look like a development bank, which we created in Russia . However, the US banking system has never had such an experience. This news will show a short-term positive influence on the markets, although one must not think of it as manna from heaven, the solution of all problems,” the expert said.

Oleg Abelev believes that the funds to create the new organization could be assigned from Obama’s anti-crisis plan, which stipulates the allocation of nearly a trillion dollars to support the economy.